Columbia Banking System, Inc.

Welcome to the Columbia Banking System third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jackie Bolin, Investor Relations Director, to begin the conference call.

Thank you, Gigi. Good morning, everyone. Thank you for joining us as we review our third quarter results. The earnings released in corresponding presentation are available on our website at ColumbiaBankingSystem.com. During today's call, we will make forward-looking statements which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filing. We will also reference non-GAAP financial measures and I encourage you to review the non-GAAP reconciliations provided in our earnings material. We'll now hand the call over to Columbia's President and CEO, Clint Stein.

Thank you, Jackie, and good morning, everyone. Our third quarter activities and results demonstrate our commitment and continued progress toward regaining long-term top quartile performance. We grew core deposits, even as we reduced their cost. We also completed the near-term initiatives we detailed in April, and we continue to reinvest in our people, systems, and processes to drive our franchise profitably forward. When we spoke last quarter, I outlined the drivers of $270 million in merger-to-date gross expense reductions, and we fully achieved our target during the third quarter. Our operational effectiveness work eliminated redundancies and streamlined operations, making our organization more efficient. This work is enabling us to better serve our customers and our communities while enhancing long-term shareholder value. Our gross expense saves represent double the $135 million we outlined at the announcement of the merger. The merger-to-date net savings of roughly $213 million accounts for $45 million of franchise expansion and reinvestments made leading up to and shortly after the merger close, as well as the additional $12 million of investments planned in the coming months and quarters. Our expense run rate in the third quarter was just below the expected fourth quarter annualized run rate we have consistently discussed since March. Planned reinvestments will continue into 2025. Our cost-conscious culture will support a reasonable amount of inflationary lift from this level. However, we will continue to remain diligent with resource allocation and work to find expense offsets for franchise reinvestment beyond the $12 million already earmarked. We believe our reinvestment dollars will support the continued growth and competitiveness of our company. We continue to remain an employer of choice for experienced bankers throughout our footprint. Our ability to attract top talent enabled us to enter and grow our newer markets like Arizona, Colorado, and Utah, while continuing to invest in long established regions. Recent examples include establishing a team of seasoned private bankers in Colorado, commercial banking teams in southern Idaho and northern California, and a new market leader for southern Nevada. In all cases, these new team members have spent their careers serving a broad range of customers, ranging from families and entrepreneurs up through larger commercial clients within these markets. We opened our second retail branch in Arizona and announced a planned third location in Mesa to supplement the commercial teams that established our presence in the state three years ago. Subsequent to quarter end, we have identified the site for our fourth Arizona office and will provide more specific details on next quarter's call. We also continue to enhance our internal technology in support of our associates. We are piloting applications to improve efficiency and we are onboarding a thousand associates to an upgraded CRM tool. The third quarter also included a reduction in transactional loans and funding sources. Solid seasonal customer deposit growth and an intentional reduction in transactional real estate loans enabled us to reduce broker deposits by 20% during the quarter. Although commercial loan growth was below our expectations, portfolio activity reflected healthy customer behavior, which Chris will cover in more detail. We are very optimistic for the future of our company. With the merger and integration behind us, Activity throughout our organization is fully focused on driving balanced growth with new and existing customers, and we continue to win business every day. We're driving franchise value through relationship banking, and we will continue to opportunistically reduce our exposure to transactional loans and funding sources. We continue to remain laser-focused on regaining Columbia's placement as a top-performing bank that produces long-term, consistent, and repeatable results. I'll now turn the call over to Ron.

Okay, thank you, Quint. We reported a second quarter EPS of $0.70, an operating EPS of $0.69 per share, and our operating return on tangible equity was 16%, while the operating PPNR was $221 million. Please refer to the non-GAAP reconciliations provided at the end of our earnings release and presentation for details related to our calculation of operating metrics. On the balance sheet, we maintained our target interest-bearing cash levels of approximately $1.5 billion. As Clint mentioned, loans declined $200 million in the quarter, driven mostly by reduced transactional loans, and deposits in total were flat. Within deposits, we saw the seasonal increase in non-interest-bearing DDA, along with strong customer interest-bearing deposit growth, and utilized the excess to reduce broker deposits by $635 million, or 20%. along with reducing term borrowings a quarter billion dollars. Within investments, the increase in available for sale investments was market value driven as the bond market rallied during the quarter. The locked out structure of the portfolio combined with this rally led to the 50% reduction in our accumulated other comprehensive loss, adding $1.06 or 6% to our tangible book value per share. Overall tangible book value per share increased 10% to $17.81. Our net interest margin was stable at 3.56% in Q3 and on the upper end of our estimated range of 3.45% to 3.60%. Our interest-bearing deposit cost declined to 2.95% for Q3. Given the Fed's 50 basis point cut late in the quarter, it may help to compare the month of September to the month of June. Our month of September interest-bearing deposit costs was 2.90%, down 10 basis points from 3% in June. More importantly, the spot cost as of September 30th was 2.74%, down 26 basis points from the month of June. This represents a beta of 52% in a very short period of time. Now I want to thank all of our bankers and support professionals for their timely work with customers on reducing deposit rates. It was great to see the speed with which they worked, and it is reflective of a relationship-making strategy where our customers bank with us for the value our bankers provide, not just rate. Absent any further Fed moves down, we expect continued reductions in our interest-bearing deposit costs in Q4, given the term structure on time deposit repricing and wholesale funding. along with continued expected reductions in wholesale funding balances. Our projected interest rate sensitivity under both ramp and shock scenarios remains in a liability-sensitive position, and we expect our rates down deposit betas to approximate those experienced on the way up. Our slide deck includes enhanced repricing and maturity disclosure, including details on over $8 billion in customer CDs and wholesale funding that matures over the next six months. Our provision for credit loss was $29 million for the quarter. The portion related to our leasing portfolio declined again as expected this quarter to $16 million. Our overall allowance for credit loss remains robust, increasing to 1.17% of total loans or 1.34% when including the remaining credit discount. The total gap expense for the quarter was $271 million, while operating expense was $268 million. In Q2, we had the restructuring charge along with the non-recurring credit, so our operating expense of $268 million for Q3 was lower than the $270 million normalized level in Q2 and $287 million in Q1, reflecting continued achievement of our efficiency initiatives. The Q3 level, excluding CDI monetization, annualizes at $957 million. Clint mentioned our reinvestment plans earlier, which will increase our quarterly operating expense, excluding CD amortization, into the annualized range of $965 to $985 million. We expect continued annual inflation of approximately 3% on top of our expected Q4 exit range, inclusive of items such as the typical Q1 payroll tax increase, a 7% increase in health insurance costs, and the annual merit cycle for the end of Q1. We'll always work to find additional efficiencies to help offset these pressures and enable continued franchise reinvestment. And I'll close with commentary about our regulatory capital position. Our risk-based capital ratios increased as expected in Q3 and are now all above our long-term target levels. We expect capital ratios to continue to build, which will provide enhanced future allocation flexibility. With that, I will now turn the call over to Frank.

Thank you, Ron. The stable performance of our loan portfolio highlights the strength of our through-the-cycle underwriting process, portfolio management, and the quality of our borrowers and sponsors. As we transitioned to a more typical credit environment after a period of exceptional quality, we observed a 22% improvement in 31- to 89-day delinquencies, reducing them to $67 million, following similar improvements in the previous quarter. The slight increase in non-accrual loans and 90 plus delinquencies reflects normal business fluctuations and the migration of smaller credits affected by higher interest rates. Classified loans declined due to risk rating upgrades and a payoff during the quarter. Our proactive and detailed monitoring of the portfolio continues to reveal no systemic issues across various industries, sectors, or geographic regions. At the end of the quarter, there were effectively no delinquencies in our entire non-owner-occupied and multifamily portfolios, with no charge-offs in either category. Overall net charge-offs for the company stood at an annualized rate of 31 basis points for the quarter, with the bank contributing 10 basis points and FinPAC 21. As mentioned in previous quarters, loss activity within FinPAC was anticipated to improve. and did by approximately 20% this quarter, reflective of an annualized rate of 4.7%. We are pleased with this progress, but we are not finished. We remain very satisfied with the quality and directionality of our granular and diversified loan portfolio, which is detailed further in our investor presentation. It remains relatively predictable and boring. Similar to waiting in line for a haircut. I'll now turn the call over to Chris.

Thank you, Frank. Customer deposit growth during the third quarter reflects continued success through targeted small business campaigns, expanding balances with existing commercial and new relationship customers. Customer deposit balances increased $602 million, enabling a 20% reduction in brokered deposits. Core deposit growth occurred even as we reduced the rate on deposits both ahead of and following the Fed funds rate reduction in September. Our teams continued to lead with service, not price, in their customer interactions. Our branches wrapped up their summer small business campaign in July, and we launched a new campaign in September that will run through the next several weeks. Through mid-October, our three highly successful campaigns have generated $600 million in new deposits, and account retention from the first two campaigns exceeds 99%. We are also seeing a related increase in cross-department referrals as we work towards additional needs-based solutions for our customers. As a reminder, there are no special products or pricing associated with these campaigns, and we would like to thank our bankers for their focus and attention to driving new relationships to the bank. Loan balances declined by $207 million during the quarter as we intentionally allowed transactional real estate balances to trend lower. Healthy customer activity, which includes business and property sales as well as project completions, also contributed to net portfolio contraction during the quarter. We continue to target a low single-digit level of loan growth in the current operating environment as our activities focus on relationship-driven commercial loans and the balance deposit and core fee income growth that activity supports. Our core fee income pipelines continue to expand across all categories. Treasury management and commercial card income increased by 12% and 19%, respectively, for the year-to-date period. Income from wealth management is also up notably for the period as our teams continue to find opportunities following our transition to a new broker dealer platform at the end of last year. Additionally, our trust team is benefiting from our new larger organization, handling more referrals and onboarding new relationships. While overall non-interest income remains a relatively smaller percentage of our total revenue, the favorable trends in our collective product and service income will drive incremental bottom line growth over time, helping to diversify our revenue stream while strengthening and deepening our customer relationships. I'll now turn the call back over to Clint.

Hey, thanks, Chris. We remain committed to optimizing our financial performance to drive long-term shareholder value. Our bankers' activities and the organic runoff of transactional loans and funding sources drives us closer to optimal capital efficiency. As Ron mentioned, Our capital position continues to build, and our ratios are expanding in line with our expectations. With a total risk-based capital ratio of 12.5% at the holding company and 12.2 at the bank, we are above our long-term targets of 12%. Our TCE ratio was 7.4% at quarter end, up from 6.8% at June 30th, as capital generation received an added lift from favorable AOCI changes. Our performance continues to demonstrate our ability to organically generate capital well above what is required to support prudent growth and our regular dividend, providing us flexibility for considering additional returns to shareholders. This concludes our prepared comments. Tori, Chris, Ron, Frank, and I are happy to take your questions now. Gigi, please open the call for Q&A.

As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Clark from Piper Sandler. Hey, good morning, everyone.

Morning, Matt. Just starting on the core margin, We had a Fed cut, obviously, late in the quarter. We gave us the spot rates on deposits, which is really helpful. But any color on kind of where your core NIM kind of settled out at the end of September, maybe on a spot basis, and just your kind of near-term thoughts on the core NIM given not only the rate changes but also your expectation for deposit flows?

Hey, good morning, Matt. This is Ron. Yeah, on the NIM, I mean, we're not declaring a victory on the inflection point with the core up, but the bigger driver is going to be, again, deposit flows. I do feel good about the tailwinds we have with the $8 billion of CDs and wholesale funding that we laid out on that new table on slide 20. But again, I think normalized deposit flows would be the key. Generally, in the fourth quarter, we see it flat up slightly early in the quarter and then tailing off later in the quarter. This is, of course, long-term seasonal averages around property tax payments, year-end distributions, things of that nature. So we'll see how it plays out. But feel good about the tailwinds, at least, at this point.

Okay. And then just on the adjusted expense kind of annualized run rate guide, how do you feel about that range? Do you feel like you could hit the low end of that range here in 4Q?

Yeah, I do. And more importantly, as we look at that range going into 2025, we talked about the expectation for approximately 3% inflation on that. Generally, seasonally over the course of the year, your payroll taxes pop in Q1 and Q2 and come down a bit, Q3, Q4, merit cycles usually into Q1 looking forward. The health insurance costs, of course, are throughout the year, but feel good about that. We know we've got quite a few reinvestments that are in flight. We'll make continue to make additional reinvestments. But you're talking only a couple million dollars a quarter annualized to get into the, you know, basically midpoint of that range from where we're at now. So we're pretty close.

Okay. And then just on the buyback, Clint, I know rates are up here more recently, but, you know, definitely getting closer to that 8%, you're above where you want to be, I think, on regulatory capital. Any chance, I mean, what's your expectation in terms of potentially buying back stock? Should we have to wait for mid next year? Or do you think it could be a lot sooner?

Well, I mean, I think that this is, you know, ongoing conversations that Ron and I have with our board. And, you know, we're, as you mentioned, we're above on the regulatory side. You know, the 8% on TCE is, is, is kind of a range. It's not a hard floor like how we view the, say, 12% on total risk-based capital, for example. So I do think that as we set out at the onset of the announcement of the merger and what our expectations were in terms of capital generation utilization, that it was going to be a capital return story for shareholders. And I do think in 2025, we enter into that window and that dynamic. So in terms of timing of what it might look like, it's probably too preliminary to really pin that down. But it is something that we're actively evaluating internally. Great.

Thank you.

Thanks, Matt.

Thank you. One moment for our next question. Our next question comes from the line of David Feaster from Raymond James. Hey, good morning, everybody.

Good morning, David. Let's start on these small business campaigns. I mean, you guys have had a ton of success with this. Retention has been extremely high. I'm curious whether these have been more targeted to specific markets or geographies or have they been broad based? And do you see additional opportunity here, I guess, for additional campaigns and then just to deepen the relationship with those that you've won and continue driving further growth? I guess I'm both alone in deposit fronts.

Yeah, David, this is Chris. Thanks for the question. Um, it's really been, and we've talked about it previously. It continues to be broad based. It's across all markets, um, wide participation, all branches, um, in every campaign of have achieved results in that. And, you know, it's really to, um, the relationship strategy, bringing in, um, new relationships from the standpoint of getting to know people, sharing what we do. sharing the value that our bankers bring each and every day to those relationships and in that kind of community bank at scale way that we think about things. I think what's most impressive is that we do continue to see the deepening of relationships with merchant and corporate card and some wealth management referrals, treasury management referrals. So the targeted businesses are are things that could continue to grow with us. We're also uncovering larger opportunities that get referred off to the commercial bank and we've got some great partnership stories. The team's working well together to land some bigger relationships as well with it. But yeah, it's really, it's across the board. We haven't armed them with, like I say, any special pricing or product. It's everything we have off the shelf put together for the benefit of the customer and and solving their needs, and it's working out extremely well. We could be more pleased. Going forward, you know, we'll take a little break here in about mid-November, let everybody kind of catch up, refresh, and, you know, I fully expect we'll have something that comes out in the first quarter of next year, and we'll continue there. It's kind of more of a way of life than it is a campaign, if you will.

Okay. That's great. And then, you know, you guys have also been active with expansion plans, right? Both on the hiring side and the expanding the branch network. You talked about that in the prepared remarks. How do you think about opportunities going forward? You know, it seems like Arizona is obviously a focus just given the branches that you're opening there. But looking at the branch maps, you know, Colorado, Utah, Nevada seem to be pretty attractive opportunities, especially just given those hires. How do you think about DeNovo expansion opportunities where you're focused and And whether organic's the best way to do it, or could M&A be an opportunity to help supplement the organic expansion that you're doing?

Hey, David, it's Tori. I'll take the first part of that and let Chris and Clint kind of weigh in at the end of it. We have basically four, I would say, de novo markets over the last year and a half or so. You've got Utah, Colorado, Arizona, and then a little bit in Northern California, and just kind of a specialty team. that we've hired into the bank and then kind of put a branch system around it, some private banking folks around it to kind of fill in this full relationship banking. I mean, one of the great things about the company is really our ability to attract talent into the organization, as Clint mentioned earlier. I mean, folks want to be here and want to work here and find this place to be a great place to be successful. In all of those markets, the de novo markets, we've been profitable within a year. And they're starting to drive some nice, really nice balances and some growth in relationships. Really a prime example is our wine team in Northern California. You know, they've got about 17 million in outstanding loan balances and about 95 million in deposits. So just a really nice a really nice mix for the company and some really nice strong relationships. And we see that in all of our de novo markets. So we'll continue to kind of infill on that and to grow as we are presented with the opportunity to get the right talent into the company continuously. Another real important market for us on an expansion plan is going to be Southern California. There's just tremendous density in Southern California. We've got some really good, strong teams there today. We've been very successful. We will continue to invest in the market and grow in Southern California as well. So I think really good opportunity just organically for us to continue to invest in those markets and to grow quite nicely.

And I'll jump in on the back half of that question. As usual, David, you pack a lot into your questions. But from an M&A perspective, our focus is really getting the most performance we can out of the company that we're running today. And we're very excited about the opportunities that we have. And as Tori mentioned, those de novo markets. Even our long, well-established markets, I mean, we continue to win new business every day and take market share from the larger banks. And so there's a lot of enthusiasm around what we can just do on an organic basis. You know, the M&A front itself, I mean, we should talk next quarter. There's quite a bit of election activity going on, and whatever the outcome is, Um, it will have an impact on a bank, our size and, um, you know, and so, um, as, as we get greater clarity on that, as we get greater clarity on, on where the fed takes interest rates and how that looks, um, our, our, you know, our thoughts might change, but, uh, but right now that focuses is truly on getting the most that we can out of the company that we're running.

Okay. That makes sense. And then maybe just staying on the organic growth side. I mean, look, Clint, we've talked in the past about the pipeline your bankers have and the momentum that it seems to be picking up. It hasn't necessarily materialized yet, you know, as payoffs and paydowns have been a headwind and some of the strategic runoff in the CRE book. But I'm curious how the pipeline is shaping up, where you're seeing the most opportunity as you think about that low single digit pace that you talked about and just the competitive landscape on the growth front from your seat.

Yeah, David, it's Tori again. The pipeline's been pretty stable and steady over the last several quarters. We talked previously about the total pipeline staying about the same, but the mix changing from real estate pipeline being down a little bit and the CNI pipeline up a little bit. That continued even into this quarter, and the overall number's about the same, and it's a nice, healthy loan pipeline spread throughout the company. So I feel really good about continuing the low to mid single digit loan growth number and kind of core relationship banking, excluding some of the transactional rundown in real estate that we'll see a little bit of as we continue to go forward. There's a very nice pivot in the company of moving away from transactional into full relationship banking. So The lending piece is just one part of it. And going back to even Chris's comment on the small business campaigns of bringing small business relationships into the bank, deposit and loan and fee income relationships into the bank. So when we look at the pipeline, the fee income pipeline is very strong and healthy. Chris mentioned a couple of statistics on just some growth we've had in treasury and other parts of the company. And we'll continue to see that because the bankers are doing an exceptional job focusing on all different parts of a relationship to bring into the company as we look to add value to our customers.

That's great. Thanks, everybody.

Thanks, David.

Thank you. One moment for our next question. Our next question comes in the line of John Armstrong from RBC Capital Markets.

Hey, thanks. Good morning, everyone. Morning, John. Just to follow up on loans, Chris, can you talk about how large that pool of transactional loans are that you're looking to reduce?

Well, I think we've previously talked about between multifamily and single family, there was approximately $6 billion on the balance sheet that didn't have relationships attached to them. And bankers are working to try and generate relationships. That's not always the easiest thing to do, but That gives you kind of a marker that's out there. They come due over time, so it's not anything that happens tomorrow by any means, but it's always under evaluation.

Okay. Yeah, it seems like it was a pretty heavy prepayment quarter for you. Is that strictly from that, or is there anything else that's going on there?

Yeah, let me, I'll just, this is Tori, I'll just weigh in a little bit on that part of it. You know, one thing we did have was a very large C&I loan that got paid off. The customer had a really nice business that we banked for a long period of time and they sold it. And somebody else wrote him a big giant check and they paid us off. So that was kind of an anomaly for what we typically see, but it was a pretty big number. So that has an impact as well, a little bit.

Yeah, okay. Okay, that's helpful. Good. Ron, on slide 21, it's a good slide, the balance sheet optimization slide. What do you want us to take away from this slide and what could make this more likely to happen?

My takeaway from this is recognize these two items together are a headwind today. In a lower rate environment, they'll be relatively neutral. We look at it as We've isolated this as non-relationship focus, so inconsistent with our strategy going forward, but just more so from a visibility standpoint that we're going to have a lot of optionality in the future as rates decline to reposition portions of the balance sheet, reallocate capital to continued organic growth and reinvestment opportunities. So really just calling it out for the headwind it is today. Ideally in the future we'll be able to remove that when we get a bit lower on the rate side.

uh over time these will run down naturally based off schedule amortization but at some point in the future we'll have the opportunity to uh deleverage this portion okay okay good so nothing imminent but just flagging it okay um yep okay and then just a follow-up on the um the small business deposit campaign you said that's really not rate driven but what kind of pricing on those new deposits are you offering

It's just our normal posted rates that are out there, and so there's certainly a range in there, mid threes to upper threes. There could be some CDs that are still at about four, but it's just our posted rates and nothing special that goes along with it.

All right. Thank you very much.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Terrell from Stevens.

Hey, good morning. Morning.

I was hoping to dig into maybe just some of the loan yield repricing dynamics. The core loan yield of kind of six basis points this quarter was maybe a little better than I expected, especially given the move or the leg down we saw kind of mid-quarter in SOFR. So I guess it kind of implies that some of the repricing dynamics of a fixed rate or adjustable rate is a bit better than I was thinking. Can you maybe just talk through some of those dynamics over the next few quarters, how much you have coming up that's fixed rate, adjustable, and the incremental spread you think you can get on those loans?

Yeah, great questions. And I'm going to highlight, again, slide 20 of our investor presentation. Jackie did a great job pulling together all that information for you, bottom left, just in terms of the loan portfolio between fixed maturity by period, floating repricing by period, and adjustable repricing by period. So you can see that tail over time. And also we'll call out, again, at the very bottom of that table, we highlight the over $8 billion of wholesale funding between broker CDs and term advances, which will have repricing lower opportunities in the quarter, exonating with the Fed.

Yeah, so if I'm reading it right, you know, in like the four to six month bucket, call it 500-ish million or so of fixed and adjustable repricing. Does that sound like a fair amount kind of on a quarterly basis? And then what type of spread pickup could you get on that?

Spread pickup, just in terms of as those reprice?

Yeah, just like what's the adjustable or the fixed rate, say for the $212 million, what's the yield on that that's coming due? versus where you're putting new loans on at today?

Well, this is Tori. I'll answer the new loan side. I mean, the new commercial production, it ranges based on asset type, loan type, geography, et cetera. It probably ranges from the mid-7s to mid-8s, generally speaking, for new loan activity. And it's been actually climbing just a little bit over the last several quarters, but but relatively stable.

Yeah, and just from a repricing standpoint, they'll continue to move higher just even as rates come down. The spread, of course, depends on the loan type, which are mixed throughout those categories, but we'll see continuing repricing higher from that adjustable bucket.

Got it. Okay. And if I could just shift gears a little bit, I appreciate all the commentary around capital as well as the discussion around the buyback. I'm just curious, as you kind of have conversations with the board and you contemplate incremental capital deployment from here, you've obviously also earmarked a couple of portfolios of loans that are discontinued or kind of running down over time. I guess, as you think about the buyback, is the other contemplation potentially early exit of any of those kind of loan pools? And, you know, how do you compare and contrast the attractiveness of the two?

Well, you know, we were, I guess, in my prepared remarks, I was fairly generic in terms of capital alternatives. I didn't specify buyback. But I think David and you are zeroing in on that. And that's certainly one of the things that we can consider. In terms of an early exit from those transactional portfolios, I think, as Frank said, credit is as boring as waiting in line for a haircut, and we have zero concerns about the credit quality of these portfolios. You know, and so we look at, you know, I think in March when we first started identifying these and publicly talking about them, you know, created an earnings or it was an earnings headwind, and it still is in terms of when you look at the wholesale funding that we have on our balance sheet, the rates that we're paying on that versus the yields on these loans. Now, As rates have come down, that earnings headwind is getting lighter and diminishing. It's still there. But the market price, if we were to go price these and look at it, I mean, we just think about it like a bond. It's going to price at a below par that... would probably have a payback period that would exceed something that I would think is reasonable given the expectation that rates are going to continue to come down. Also, if our deposit growth trends continue and we're able to continue to replace wholesale funding levels with good core customer deposits, then It really doesn't create a need to do that. You know, it will help our operating ratios. It'll free up some capital, obviously. But we're above our, broadly above our most, well, pretty much all our regulatory ratio targets. You know, we're trending in the right direction towards where we'd like to be on a TCE basis. So there's not a burning need or desire to do it. And with zero credit concerns on these portfolios, I think that the best thing for shareholders long term is to just wait it out and either let them amortize off or when rates get to a certain point, then we can decide if we want to selectively exit a substantial portion of any of these portfolios.

Okay, great. I appreciate all the color there. I'll step back. Thanks. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Chris McGrady from KBW.

Oh, great. Thanks for the question. Just a quick one on credit. Your charge-offs were very stable. Your trends were very good as well. Any update on FinPAC normalization and any other potential offsets that you're keeping an eye on? Thanks.

Sure. Yeah, as I alluded to in my remarks, we finally did see some material improvement in that number for FinPAC with them improving about 20%. That's about 4.7% annualized rate. I would expect that to come down over time to somewhere in that 3.5% to 4% range. So we've got a little bit to go. And we do expect further improvement. The fourth quarter, I'll say right now, is going to be tempered a bit because of just the difficult nature of collection activity in the fourth quarter because of holidays, vacations, and just the limited days that that creates to collect accounts. But they will continue to drop, and I think they will settle out at that 3.5% to 4% range. So delinquencies continue to decrease within that portfolio. That's another indicative sign that things are trending the right way. I mean, from Q1 to Q3, delinquencies have improved 24%, and non-performing leases have also reduced 24%. So you can see how closely those numbers tie together, right? I mean, and we in turn saw a reduction in charge-offs of 20%. So things are trending in the right way, and there's nothing else systemically at issue within that portfolio. It's normal activity and nothing systemic within the commercial CNI portfolio. I feel pretty good about it.

Okay, awesome. Thank you.

Thank you. Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our next question comes from the line of Timur Brazilir from Wells Fargo.

Hi, good morning. My question is on the securities accretion. It seems prepayments maybe were elevated again in 3Q, and I know you provide some color on the near-term uh guide there but i'm just wondering the last two couple quarters of elevated pay downs kind of what the remaining schedule might look like and if that accretion is maybe pulled forward a little bit versus the original guide yeah i mean i i i consider it to be relatively stable over time the last two quarters it was like an individual security prepaid which gave a little bit of a pop but i'd expect to see that effective

interest method amortization just to ratably run down over time. You're not going to see a significant increase in that level unless you saw a rather large rally in the bond markets driving prepays off securities purchased, say, in 2022.

Okay, but barring any additional paydowns, should we expect that level somewhere in the low 30s here going forward, or are you saying low 40s and rate that down is the right run rate?

Low 30s specific to investment security discount accretion? Right, yes. I don't have that number right in front of me here, but I'd assume pretty consistent trends, just slightly lower than what you saw the last couple quarters over the next handful of quarters.

Okay, great. And then, you know, certainly very encouraging on the early deposit trends with the cycle-to-date beta already kind of in the 50s and additional opportunities through 1Q. I guess I'm trying to gauge the results to date versus the expectation for beta to mirror what it had been on the way up, which also was somewhere in the mid-50s. Is a lot of that liability sensitivity kind of front-end loaded over these next couple of quarters and then stabilizes out? I guess, how are you thinking about cycle-to-date beta versus through-the-cycle beta with both of those seemingly pretty similar here?

Yeah, I mean, the historical modeling would suggest it's going to mirror, and our disclosure suggests it's going to mirror what we saw on the way up. To date, with some of the wholesale funding, we've been able to get close to that level over the course of, what, two weeks in September. But I think in terms of your question is really the time period of how long that plays out. Given the $8 billion of wholesale funding and the short-term nature of that, it's really going to be more a story of What's the tail or period of Fed moving rates slower, right? If that all occurred over the course of a couple quarters and then they stopped, then yeah, that'd be your window. But if it's over a longer period of time, that'll just continue to reprice lower. Kind of like the conversation we had earlier on the $6 billion of non-relationship loans, multifamily, single-family, resi. It's a headwind today. At some point, it's going to be relatively neutral. It's going to give us a lot of optionality.

great thanks for the questions yeah thank you thank you one moment for our next question our next question comes from the line of anthony ellian from jp morgan hi everyone just a quick follow-up on nim so your adjusted name increased about seven basis points in the third quarter but Just given the tailwinds you outlined on this call and on slide 20 on the funding side of the balance sheet and the full benefit of the September cut, you know, is it reasonable to assume a similar level of increase in the adjusted DIMM in the fourth quarter, or I guess what would hold you back from realizing a similar increase? Thank you.

It'd be bouncing along the bottom, and again, deposit flows will have such a bigger impact on that.

Thank you. Thank you. Thank you. At this time, I would now like to turn the conference back over to Jackie Bolin for closing remarks.

Thank you, Gigi. Thank you for joining us on this morning's call. Please contact me if you have any questions and have a good rest of the day. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.